What is Leave Encashment?
Leave encashment refers to the amount of money an employee receives in exchange for unused/unutilized paid leaves (Earned Leave or Privilege Leave) accumulated during their employment. It can be received at the time of resignation, retirement, termination, or even during service (if the company policy allows annual encashment).
Most companies allow employees to accumulate a certain number of leaves per year, and any unused leaves beyond a cap are either carried forward, lapsed, or encashed depending on the company’s HR policy.
Free Leave Encashment Calculator
Use this free tool to instantly calculate your leave encashment amount based on your salary and unused leave balance.
Leave Encashment Calculation Formula
Leave Encashment = (Basic Salary + DA) ÷ 30 (or 26) × Number of Unused Leave Days
Companies typically use either 30 days or 26 days (excluding Sundays) as the divisor to calculate the per-day salary, depending on their internal policy. Always check your company’s HR policy or appointment letter to confirm which divisor applies to you.
Example Calculation
Suppose an employee has a Basic Salary + DA of ₹30,000 per month and has 25 unused leave days at the time of resignation.
Per Day Salary = 30,000 ÷ 30 = ₹1,000
Leave Encashment = ₹1,000 × 25 = ₹25,000
Is Leave Encashment Taxable?
The taxability of leave encashment depends on when it is received and the type of employee:
- During Service: Leave encashment received while still employed is fully taxable as “Income from Salary” in the year of receipt, regardless of employer type.
- At Retirement/Resignation – Government Employees: Fully exempt from income tax under Section 10(10AA)(i).
- At Retirement/Resignation – Private Sector Employees: Exempt up to the least of the following: (a) Actual amount received, (b) ₹25,00,000 (revised limit), (c) Average salary of last 10 months × unutilized leave (max 30 days per year of service), or (d) Cash equivalent of leave balance (max 30 days per year of service actually rendered).
- Legal Heirs (on death of employee): Fully exempt from tax.
Leave Encashment Rules: Key Points
- Maximum leave that can be accumulated and carried forward varies by company policy (often capped at 30-45 days per year).
- Only Earned Leave (EL) or Privilege Leave (PL) is generally eligible for encashment — Casual Leave (CL) and Sick Leave (SL) usually lapse and cannot be encashed.
- Government employees can accumulate up to 300 leave days for encashment purposes at retirement.
- The encashment amount is calculated based on the last drawn Basic Salary + DA, not the gross salary.
Frequently Asked Questions (FAQs)
1. What is the difference between leave encashment and gratuity?
Leave encashment is payment for unused paid leave days, while gratuity is a separate retirement benefit paid for completing a minimum period of continuous service (usually 5 years), calculated using a different formula. Both can be received at the time of leaving a job. Check our Gratuity Calculator to estimate your gratuity amount separately.
2. Can sick leave or casual leave be encashed?
Generally no. Most companies only allow encashment of Earned Leave (EL) or Privilege Leave (PL). Casual Leave and Sick Leave typically lapse at the end of the year and cannot be converted to cash.
3. Is leave encashment paid along with the final salary?
Yes, in most companies, leave encashment is included as part of the full and final (F&F) settlement, paid along with the last month’s salary, gratuity (if applicable), and any other dues.
4. What is the leave encashment exemption limit for 2026?
For non-government employees, the tax exemption limit on leave encashment received at retirement/resignation is currently ₹25,00,000. Any amount above this, or any amount received during service, is fully taxable.
5. How many leaves can I encash at once?
This depends entirely on your company’s leave policy. Some companies allow encashment of the entire unused leave balance, while others cap the encashable leaves to a certain number of days per year (commonly 30 days for tax exemption purposes).
Conclusion
Leave encashment is a valuable benefit that compensates employees for leaves they did not use during their tenure. Use the free calculator above to get an instant estimate of your leave encashment amount. For exact figures and tax treatment, always refer to your company’s HR policy and consult a tax advisor if the amount is significant.